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2 This publication has been developed by the U.S. Department of Labor, Employee Benefits Security Administration (EBSA), and its partners. It is available on the Internet at: To view this and other EBSA publications, visit the agency's Web site at: To order publications, contact us electronically at: Or call toll free: This material will be made available in alternate format to persons with disabilities upon request: Voice phone: (202) TTY: (202) created by Employee Benefits Security Administration in partnership with We also thank the AARP for its valuable contributions to this publication. This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Act of January 2012

3 TABLE OF CONTENTS PLANNING FOR A LIFETIME Chapter 1 TRACKING DOWN TODAY S MONEY Worksheet A-Today s Money Chapter 2 TRACKING DOWN FUTURE MONEY AT RETIREMENT AND AFTER Worksheet B-Your Money...10 Years from Today Worksheet C-New Savings Between Now and Retirement Worksheet D-Monthly Income Over a 30-Year Retirement Chapter 3 TRACKING DOWN FUTURE EXPENSES Worksheet E-Monthly Expenses Today Worksheet F-Monthly Expenses in 10 Years Chapter 4 COMPARING INCOME AND EXPENSES Worksheet G- Comparing Projected Income and Expenses Worksheet H-Additional Savings Needed Before Retirement Chapter 5 MAKING YOUR MONEY LAST Chapter 6 TRACKING DOWN HELP FOR RETIREMENT RESOURCES

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5 PLANNING FOR A LIFETIME It's not going to be your parents retirement rewarded at 65 with a gold watch, a guaranteed pension, and health insurance for life. For many Americans, retiring in this century is a mystery. Earlier generations of workers could rely on employer-provided pensions, but now many workers will need to rely on their own work-related and personal savings plus Social Security benefits. These savings have to last longer because Americans are living longer, often into their eighties and nineties. If you are one of those people who want to plan and are about 10 years from the day you retire this booklet is for you. Today s (and tomorrow s) retirees may well have a new kind of retirement. With a longer and healthier life span, bikes, boats, planes, and RVs may be part of your life, because you are more likely than previous generations to be an active older American. 2

6 Opportunities to take courses, start a new career, and become a volunteer can make your future an adventure. A longer life, however, will also mean more medical care, some of which will not be covered by the federal Medicare program. The whole retirement scene has changed and many American workers find it a mystery. In fact, a 2011 survey by the Employee Benefit Research Institute (EBRI) suggests that only 42 percent of Americans have tried to calculate how much they need to save for retirement. In this booklet, each chapter will give you clues on how to take control of your finances so that when you retire, you have the time and money to do what you've always wanted. For some, it's simply being with friends and family. For others, it's starting a new hobby or craft. And for some, it s starting a new life. Whether you are 10 years from retirement or have a different timeframe or even if you are retired this booklet will help you to unravel the financial mysteries of life after work and to discover changes you can make for a financially secure future. Time on Your Side Getting started today will help you put time on your side. To help, Taking the Mystery Out of Retirement Planning offers a simplified, bottom-line approach to figuring out just how much you may need when you retire. The worksheets in this booklet will provide a guesstimate. Regard them as a starting point. Each chapter in this booklet asks you to chart a different part of your financial life your savings and your expenses and helps you project future costs and savings well into your retirement years. Of course, no one has a crystal ball, and life has a way of throwing changes our way. But getting time on your side now, before you retire, means you will not be awake at 3 a.m. worrying about, instead of planning for, the future. How to Use This Booklet: Simply read it to get familiar with retirement issues. Better yet, fill out the worksheets to figure the dollar amounts of what you have, how much it will grow in 10 years, and how much you may need to last over a 30-year period. Remember these amounts are only estimates, and you will want to update them from time to time. Interactive versions of the worksheets are also available online at to help with the calculations. Take your time. You may want to tackle one or two chapters, fill out the worksheets provided and then spend some time gathering the documents and information you will want to keep. Whether you approach the booklet chapter by chapter or all at once, keep going. Don't get stuck on details guessing is okay, and you can always come back later with more accurate numbers and information. This booklet uses three time periods in charting your retirement savings. The starting point is today, when you are about 56 years old and plan to work approximately 10 years more. This is a good time to take stock of where you are in terms of retirement savings and set financial goals you would like to achieve in the 10-year period you plan to work. 3

7 The second point in time is the day you retire, when you are about 65 to 66 years old. That period between now and then is an important one. In those (approximately 10) years, you will have time to put more of your paycheck to work in a retirement account. It will grow, not only from your additional savings, but also from the miracle of compounding, the world s greatest math discovery, according to everyone s favorite genius, Albert Einstein. This is the result of earnings from interest and from investments continually increasing the base amount. Finally, the third time period used in this booklet is the approximately 30-year span you hope to enjoy retirement. It is the time period experts suggest you plan for, based on the average 65-year old American male living 17 more years and the average 65-year old female living 20 more years. These are only averages, so planning for 30 years will help you avoid outliving your income. As you read through this booklet, keep an eye on the Timeline for Retirement that follows. Some of the terms, like "catch-up" retirement contributions beginning at age 50, may be new to you. The timeline offers some milestone opportunities to make changes so you can have the kind of retirement you want. The time to start is today. CLUE 1 Timeline For Retirement: AT AGE 50 Begin making catch-up contributions, an extra amount that those over 50 can add, to 401(k) and other retirement accounts. AT No more tax penalties on early withdrawals from retirement accounts, but leaving money in means more time for it to grow. AT 62 The minimum age to receive Social Security benefits, but delaying means a bigger monthly benefit. AT 65 Eligible for Medicare. AT 66 Eligible for full Social Security benefits if born between 1943 and AT Start taking minimum withdrawals from most retirement accounts by this age; otherwise, you may be charged heavy tax penalties in the future. 4

8 Chapter 1 TRACKING DOWN TODAY S MONEY 5 This chapter will help you shine a light on the mystery of where you will find the money to support yourself in retirement. Many people don t have a clear idea of how much money they actually have, so it s hard to know how much they might be able to count on when they no longer work. Finding out what part of today s money can go toward retirement simply means adding up the value of all your current assets. In this case, "assets" are cash, investments, and anything of value you can exchange for cash, like your house, savings bonds, or even fine jewelry. This figure will be your first important clue. Recording these amounts could be a pleasant surprise. You don't want to count emergency money and savings for your children's education or a big trip only money that you are not going to touch for at least 10 years. For purposes of the following worksheet, you also don't want to include any future Social Security benefits and guaranteed pensions because these items are future income, not current assets (and they will be included later). Money in work-related retirement plans, like 401(k) plans, is counted, however, and you will want to include amounts from current and former jobs. In fact, these assets will probably be at the top of your today s money list that follows. More Than You Think Tracking your money in retirement plans should be fairly easy. If you didn't roll over your retirement plan balance when you changed jobs into a new retirement plan account or into an IRA, or if you didn t take your account balance as cash, you may discover some forgotten retirement assets you have. This is a good time to think about keeping your money with fewer, rather than more, quality financial institutions so it is easier to manage. Recording current and old retirement account amounts on Worksheet A, Today s Money (see page 8), is important for a couple of reasons. First, locating any old account could take time. The longer it's "lost," the harder it will be to find. Second, understanding your current financial standing should automatically start you thinking about how to make your money grow. Quit Worrying, Start Planning Remember you're facing a retirement that's probably going to be longer than your parents' and will involve more uncertainties. This new kind of retirement probably means there are many American workers worrying about, instead of planning for, the future. You can choose to stop worrying and start figuring. Not only will you come up with facts to work with, the chances are good you might change the way you save. The 2011 EBRI survey found that 44 percent of people who tried to figure out their financial futures ended up changing their retirement savings plans.

9 If you are a married woman: In preparing for retirement, women face the very real possibility of spending part of their retirement years without the support of a husband -- most likely through widowhood. The loss of a spouse can sometimes mean the loss or reduction of benefits that can place women in financial jeopardy. For that reason, women will need to focus on their financial resources as a single person as well as half of a couple. For purposes of the following worksheets, consider filling them out as a couple and as a single person. Consider what happens to your Social Security and to retirement benefits if your spouse dies or you divorce. Know what assets you can count on. Check Social Security benefit documents, retirement plan documents, and wills. Remember that wills are important, but they may not provide the protection desired. Depending on the way assets are titled or the terms of a will, the money women believe they can count on may not be passed to the surviving spouse. 44 percent of people who tried to figure out their financial futures ended up changing their retirement ABOUT WORKSHEET A (PAGE 8): savings plans. When filling out the worksheets that follow, remember to include your spouse's assets if you're married. Like all of the worksheets in this booklet, be prepared to redo this first one. A raise and changes in your investments, for example, will affect the numbers on Worksheet A. To make it easy, extra worksheets are included at the back of this booklet. TODAY S MONEY Here you will write down money you have today that you plan to use when you retire in about 10 years (do not add Social Security and traditional pensions at this stage; they will be figured in later on). The first money source, the balance on your current retirement plan account at work (a 401(k) 6

10 plan, for instance), should be easy to find. If you don't have a recent statement, ask the benefits department at work. If you rolled over accounts from former jobs into an IRA, then read your statement or call the financial institution holding this account. In addition, get statements from all your bank or mutual fund IRA accounts, Keogh retirement savings, Simplified Employee Pension-IRAs (SEP- IRAs), and Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) plans. Personal savings and investments are next as possible retirement resources. They could be in a savings or checking account at a bank or credit union or in a brokerage account. The assets in these accounts may include cash, U.S. savings bonds, certificates of deposit, stock and bond mutual funds, and individual stocks and bonds. To get a dollar amount for your home equity, subtract the current mortgage balance from the current market value of your house. Also subtract the amount you owe on home equity loans or lines of credit (enter it as a negative amount on the worksheet). The bank holding the mortgage can provide the amount of your remaining mortgage balance. An appraiser or real estate professional can give you an estimate of the value of your house in the current market, or you can check on the Internet recent sales in your neighborhood (real estate values can change, however, so check your home s value from time to time). Be realistic about how much of your home equity might be available for retirement. Remember that you will always need housing, and that condo fees, real estate taxes, maintenance and repairs, and rent tend to go up. Other assets could be valuable collections or the cash value of life insurance. Keep in mind that the actual value of items like houses, boats, and collections can be determined only when real buyers make real offers. Be realistic about how much of your home equity might be available for retirement...you will always need housing. 7

11 WORKSHEET A TODAY S MONEY Instructions: Record amounts for yourself and for your spouse in columns 1 and 2. Add up the money across each row for you and your spouse and write the total in column 3. Then add all the numbers down column 3 and write the total in column 3 at the bottom. Work-related retirement savings 1 You 2 Spouse 3 Total 401(k) or 403(b) Keogh SEP-IRA SIMPLE IRA Other IRAs (traditional) IRAs (Roth) Other Home equity Market value of home Mortgage and liens (enter as negative amount) Personal savings and investments Other assets (collections, etc.) TOTAL ASSETS 8

12 Chapter 2 TRACKING DOWN FUTURE MONEY-AT RET IREMENT Now that you know from Chapter 1 how much money you have today, you can estimate how much that money could be worth because it will probably grow in the 10 years between now and retirement. The worksheets will help you project a 10-year total, which will help you estimate a 30-year total. Yes, it s just a guesstimate, because the further in the future you plan, the more that can happen. But the totals give you some idea of how much you may have for your retirement years.* In addition, the worksheets in this chapter will let you see how much your money can grow by investing it in different ways. In fact, you will be able to assign different rates of return to different types of savings and to see how your decisions can impact the growth of your money over the next 10 years. Rates of return are simply the amount your money earns over a certain period. How your money increases over time will depend on the nature of your investments, the rates of return, and other factors, such as the economy. One kind of investment, for instance, is a bond, which is often referred to as a "fixed income" investment because the interest rate is fixed. As an example, if you owned a bond with an original value of $10,000 and you got a 5 percent return (or yield) on your investment, your original investment would increase to $16,289 in 10 years. Digging Deeper You will probably want to dig deeper by assigning different rates of return to different pots of money workplace savings accounts, IRAs, bank savings accounts -- you have put aside for retirement. Let's say you have $2,000 in a checking account that you never use. Your rate of return, in this case, with interest compounded monthly, will be low, maybe 1 percent. But your money is safe. Then let's say you've invested in a stock mutual fund for 15 years using your retirement plan account and you get a return of 9 percent. Investments in securities can bring a higher rate of return than simple interest because prices of securities often rise and gains are compounded. Of course, security prices can fall, as we saw with stocks in 2000, 2001, and The tradeoff for aiming for higher returns is taking on more risk, including the risk of losing money. Keep this in mind in selecting rates of return for the worksheets that follow. In the example above, with some money invested in stocks and some in a safer, interest-bearing account, you are already doing what the experts recommend. You are practicing asset allocation by putting your money in different types of products that earn different rates of return. Financial planners highly recommend this technique as a way to spread risk. A general allocation is to have some money in "cash," such as a savings, checking, or money market account with 9 *People who are retired may want to skip the worksheets in this chapter and focus on the information about ways to grow your money.

13 AND AFTER little or no risk; some money in bonds, with a little more risk but paying more interest; and some money in stocks, with more risk but a likely higher return, especially in the long run. Another way to spread your investments among different categories is to invest in index mutual funds. Index funds are a collection of investments, such as bonds or stocks, that closely match the performance of the major holdings for that category of investment. For Experts recommend that you spread your money among a range of investments so that your money is diversified. instance, a Standard and Poor s (S&P) index fund tracks the 500 broadbased stocks that comprise the S&P 500 Index. A bond index fund would track the performance of major bond holdings in that index. In this way, your investment is following the financial market for that particular category. Experts recommend that you spread your money among a range of investments so that your money is "diversified." In addition, most experts add that you should not only invest among categories but within each major category as well. For instance, your risk of losing money is less if you buy shares in several mutual funds investing in various types of assets (such as large company stocks, small company stocks and bonds). Even investing in just one mutual fund will help you to diversify compared to investing in individual securities on your own, since mutual funds, by their nature, allow you to invest in a collection of stocks, bonds, etc. Financial planners believe that diversifying your investments helps reduce risk as markets move up and down. For example, in 1980 when some certificates of deposit (CDs) were paying 12 percent, stocks were barely 10

14 CLUE 2 Average Annual Returns Over 10-Year Period: INVESTMENT PERCENT Checking account/money market account year certificate of deposit 4.18 S&P 500 Index (large company stocks) 1.16 Russell 2000 Index (small company stocks) 6.27 Barclays Capital (long-term bond index) 5.84 holding their own; but in 1999 most stock prices were rising fast, and CDs were paying 5 percent. You will see sample rates of return for some common places to put your money in the box above. Too much money in one type of investment is always a bad idea and puts your money at risk. For example, many American workers are holding a lot of their employers' stock in their retirement accounts. This ties both your current paycheck and your retirement savings to one employer's success or failure. This can be risky. ABOUT WORKSHEETS B (PAGE 12) AND C (PAGE 14): One quick way to estimate how much money you could have by your first year of retirement is to multiply your total retirement assets from Worksheet A, Chapter 1, by (the factor equal to a 5 percent rate of return for 10 years). The result shows how much you will have if your money grows at 5 percent in that 10-year period. For example: $100, (total from Worksheet A) x $162, YOUR MONEY AND NEW SAVINGS The 5 percent return, by the way, is used to keep things simple: remember investment returns go up and down and cannot be guaranteed. But digging deeper may mean coming up with your own numbers, and the worksheets that follow let you do just that. To keep it simple, the worksheets give you a choice of rates of return 3, 5, and 7 percent -- and include multiplication factors for each of these rates. (Instructions continue on pg. 13) 11

15 WORKSHEET B YOUR MONEY- 10 YEARS FROM TODAY Asset Growth Factors for Three Selected Rates of Return for 3% for 5% for 7% Work-related retirement savings 1 Current $ value (from Worksheet A, Column 3) 2 Asset growth factor (rate of return) 3 Asset value in 10 years (Column 1x Column 2) 401(k) or 403(b) Keogh SEP-IRA SIMPLE IRA Other IRAs (traditional) IRAs (Roth) Other Home equity Market value of home Mortgage and liens (enter as negative amount) Personal savings and investments Other assets (collections, etc.) TOTAL ASSETS 12

16 They are lower than the 8 to 10 percent returns often used before the stock market fell in Whether you're an optimist or a pessimist about interest and rates of return, being conservative in your estimates is safer; better to have extra money than too little. Worksheet B, Your Money 10 Years from Today will let you take your current retirement saving sources and then figure out how much they might grow over 10 years, depending on how the money is invested. In Worksheet B, you will be able to transfer the dollar amounts for your income sources directly from column 3 of Worksheet A, starting with 401(k) and 403(b) plans. Then multiply each of these results by an asset growth (rate of return) factor you'll see at the top of Worksheet B. Write the total in Column 3. The rate you choose depends on what you've done with your retirement savings. If they're all in fixed income investments, your rate is predetermined. If they're in mutual funds, you'll need to do some research to figure out past rates of return as a guide for estimates for the future. Retirement plan statements should indicate past rates of return. But remember, for investments, past performance never guarantees future results. Like Worksheet A, Social Security benefits and pensions are not included since you most likely won t receive these sources of income until retirement. There will be more later in the publication about how waiting to receive Social Security (and pension) benefits will mean a bigger check. Estimating a rate of return on your home will depend on the real estate market in your community. Figure a low estimate for this and for any personal property in which the value depends on how much a buyer would pay. Also consider any mortgage or liens you have on the home since those would be repaid from any cash you would obtain on the sale of the home. If you have other investments, such as annuities, put them in the Other assets row of Worksheet B. In addition to these sources, include any money you can count on receiving in the next 10 years for example, an inheritance and enter its estimated lump-sum value. As an example of a possible calculation, suppose you have $10,000 in a traditional IRA, and you believe it will earn 5 percent over the next 10 years. Your calculation would look like this: $10, (amount in an IRA) x (rate of return factor for 5%) $16, (savings in 10 years) When you have finished Worksheet B, go on to Worksheet C, New Savings Between Now and Retirement. This worksheet will allow you to take any additional workplace and personal savings you can expect to add between now and retirement and determine how much they will grow to at the time of your retirement. You can enter any estimated periodic contributions (such as to your 401(k) or IRA) between now and retirement in the first column. Remember that you are only estimating the rate of return on this money over a period of years and that you will need to review your estimate from time to time. Multiply these amounts by the savings growth factor for the rate of return you select from the top of Worksheet C. As with 13

17 WORKSHEET C NEW SAVINGS BETWEEN NOW AND RETIREMENT Savings Growth Factors for Three Selected Rates of Return for 3% for 5% for 7% Work-related retirement savings 1 Estimated monthly savings amount 2 Savings growth factor 3 Value of savings in 10 years (Column 1x Column 2) 401(k) or 403(b) Keogh SEP-IRA SIMPLE IRA Other IRAs (traditional) IRAs (Roth) Other Home equity Market value of home Mortgage and liens (enter as positive amount) Personal savings and investments Other assets (collections, etc.) TOTAL ASSETS 14

18 15 Worksheets A and B, three different rates of return have been selected but based upon the nature of your investments, you may want to use a different rate of return. Enter the results in the third column. As an example, if you save $100 a month in a workplace 401(k) plan, and if you believe that investment will earn 5 percent per year, the calculation would look like this: $ (savings each month) x (rate of return factor for 5%) $15, (savings in 10 years) You are making great progress in tracking down your retirement assets and solving the first half of your retirement mystery. Now move on to Worksheet D, Monthly Income Over a 30-Year Retirement, to take all of your anticipated assets from Worksheets B and C and convert them to a monthly income that you can use later to compare with your anticipated monthly expenses in retirement. In this worksheet, we now add Social Security and pension benefits since it deals with income you can rely on during retirement. You can fill in the box in Column 3 for Social Security benefits by entering your estimated Social Security benefit. You may be able to estimate your benefit by using the retirement estimator on the Social Security Administration s Web site, If you have a fixed pension from work, the amount for Worksheet D is based on your pay at the end of your career. Your employer, union, or pension plan administrator can give you details about the amount and start date of your pension, and whether you will get your pension in a lump sum or fixed monthly checks (see discussion in Chapter 5 describing these options to help you choose). If you receive your benefit as a lump sum, put that amount in Column 1. If you receive it as a fixed monthly benefit, fill in only Column 3. If you were in a traditional pension plan that was abandoned for some reason, like your employer going out of business, you will still receive some (or all) of your pension benefits since these plans are federally insured. Information about your plan and benefits may be available from the Pension Benefit Guaranty Corporation. (See Chapter 6 for PBGC contact information.) For those assets you tracked down for Worksheets B and C, take the totals for each source, such as your 401(k) plan, from both worksheets, add them together and enter them in Column 1. Select an income conversion factor representing the rate of return you expect to earn on those assets in the future and enter it in Column 2. Multiply Column 1 by Column 2 and enter the result in Column 3. Remember, this calculation is a guesstimate, since things that impact your income, such as your tax status, will vary. When you add up all of the numbers in Column 3, you will have a monthly income for the 30 years of your retirement. This fixed monthly income is used to simplify the calculations. Realize that it takes into account the continued growth of your assets while you are withdrawing money to live on. Also keep in mind that while the worksheet includes your home equity, you may need to live in your home for some time or use some of the assets from its sale to purchase another home or pay for rent, so it may not provide immediate income. Here is an example of the Worksheet D calculation: $50, (401(k) account balance) x (income conversion factor for 5%) $ (per month)

19 WORKSHEET D MONTHLY INCOME OVER A 30 -YEAR RETIREMENT Social Security Income Conversion Factors for Assumed Rates of Interest for 3% for 5% for 7% Work-Related Retirement Savings Pension benefits 401(k) or 403(b) Keogh SEP-IRA SIMPLE IRA Other IRAs (traditional) IRAs (Roth) Home equity Market value of home Mortgage and liens (enter as negative amount) Personal savings and investments Other assets (collections, etc.) 1 Accumulated assets (Column 3 from Worksheet B plus Column 3 from Worksheet C) 2 Income conversion factor 3 Monthly income beginning at retirement (Column 1x Column 2) TOTAL ASSETS 16

20 Chapter 3 TRACKING DOWN FUTURE EXPENSES This chapter will start you on the road toward a realistic look at your expenses in retirement and how they will be affected by inflation. These numbers are important clues to your retirement mystery. You will be looking at your expenses today and estimating how they will change over time and, specifically, during two other time periods: the day you retire 10 years from now and over the approximate 30-year span of your retirement. In doing so, you will have some idea of whether the money you have saved will be enough to last. You will also have a chance to look at your spending patterns and decide how they could change over time. After all, you can't control inflation over this stretch of time, but you certainly can control what you spend. Your expenses will likely change as you grow older. Early on, you will spend less on work-related things like transportation and clothing. Maybe you'll spend more on traveling, hobbies, or other things you have always wanted to do. As you age, it is likely that more of your budget will go toward medical expenses, which you will read about soon. Retired people may find that recording their expenses will alter future spending patterns. ABOUT WORKSHEET E (PAGE 19): MONTHLY EXPENSES TODAY First add up current monthly expenses in Worksheet E (Monthly Expenses Today). Then in Worksheet F, Monthly Expenses in 10 Years, take those totals and adjust them for inflation to estimate your expenses during your first year of retirement. Chapter 4 will look at those expenses over a 30-year retirement and how you will be spending the income you just calculated. If you want a quick estimate of how much monthly income you'll need to cover expenses in retirement, figure on at least 70 percent of your preretirement income. Many experts are now increasing that figure to 80 or 90 percent. 17

21 Avoid getting stuck on the details and giving up because you don't have exact records of your spending. If you don t know the exact amount you pay for car insurance, for example, use a guesstimate until you can look it up. You can always come back with more accurate numbers. Don't include things like college tuition You will have a chance to look at spending patterns and decide how they could change over time. that are one-time costs. If monthly bills for one item vary, like your heating bill, get a year's worth, add them up, and divide that total by 12 for an average monthly expense. If you get a bill four times a year, add up a year s worth and divide by 12 for an average monthly cost. Remember to include your spouse's expenses if you're married and the expenses of anyone financially dependent on you. Inflation and Your Future Inflation, in its simplest terms, means that dollar for dollar your money will not buy as much next year as it does this year. This means inflation is a major factor in determining how much money you will need in retirement since, to cover inflation s impact, you will need more money every year. In other words, if your money is not earning more than the rate of inflation, you will lose part of your nest egg s buying power. 18

22 WORKSHEET E MONTHLY EXPENSES TODAY 19 You can't know and can't control future inflation. The only accurate inflation rates are from the past, and they vary widely. In 1980, overall prices went up a whopping 13.5 percent; in 2002, they went up only 1.6 percent. Looking at the past shows how rates may vary widely. Worksheet F uses the factor for a 3.5 percent rise in prices for the next 10 years. But these are estimates, and remember, we've gotten used to low inflation overall with a few glaring exceptions over the last decade. Facing Down Rising Costs One exception to low inflation rates is medical costs, which have risen faster than inflation over the last 20 years, and which some experts think will rise about 7 percent a year over the coming years. If you have, or your family history includes, a serious medical condition like heart disease, you will probably spend more on health care than you ever imagined. According to recent studies, almost 20 percent of retiree income will be spent on health care. Housing Mortgage (Including condo fees) Rent Maintenance Food (at home) Utilities Electricity Heat Internet/cable Phones Water/sewer Clothing Taxes Real estate Income (state and federal) Other property taxes Insurance House Life Car Disability Long-term care 1 Monthly Amount

23 1 Monthly Amount 1 Monthly Amount Loans Health Care (continued) Car Credit card Other Dental Vision Noncovered items Workplace retirement and personal savings Travel/vacations Personal Care Hair cut Dry cleaning Gym Other Entertainment Eating out Hobbies Movies/theater Charitable contributions Transportation Car repairs and maintenance Gas Parking Public transportation Health Care Health insurance Doctor visits Hospital Medicine Over-the-counter medicine Other Gifts Membership dues Pet-related costs TOTAL ESTIMATED MONTHLY EXPENSES (other than health) TOTAL ESTIMATED MONTHLY EXPENSES (health) 20

24 While Medicare is a great benefit to persons 65 and older, it does not cover all medical costs deductibles, copayments, and long-term care, for example. Medicare Part A covers hospital care only. Medicare Part B, an additional insurance you will be offered when you become 65, covers doctors' services, outpatient hospital care, and things like physical and occupational therapy and some home health care. The current cost of Medicare Part B is about $100 per month for most people, although some may pay more. In addition to Medicare Parts A and B, many retirees buy Medigap policies for uncovered services like dental and vision care and drugs. Depending upon where you live and the policy you choose, you can pay from well under $100 to as much as $350 a month. Medicare, private insurance, and/or Medicaid pays for only about 85 percent of retirees overall health care expenses. Medicare also has a Part C, which serves as an alternative to traditional Part A and Part B coverage. Under this option, beneficiaries can choose to enroll in and receive care from private Medicare Advantage and certain other health insurance plans that contract with Medicare. In most of these plans, there are extra benefits and lower premiums than the original Medicare plan, however your choice of doctors and hospitals may be limited, and the plans' copayments and charges may vary. You do not need to purchase a Medigap policy if you join a Medicare Advantage Plan. An additional feature is the Medicare prescription drug program (Medicare Part D). Those who become eligible for Medicare Part A and/or Part B can join a prescription drug plan offered in their area. By paying a small premium around $30 a month in 2012 those who join can get prescription drugs at a lower cost. (The Resources section on page 42 includes publications about this program.) If you are thinking about retiring early, you may have to buy health insurance until Medicare kicks in at age 65 if your employer does not cover health care for retirees. You should know that employer-provided health benefits for retirees might not be guaranteed, and could be reduced or eliminated by your former employer under some circumstances. Where Will You Live When You Retire? Make planning for your future housing needs one of your first priorities since where you live in retirement affects not only your income, but also your emotional, social, and physical well being. It is an important part of your overall retirement strategy. While the cost of owning a home hasn't gone up as much as health care, it is high in many regions. Home heating and cooling costs are rising fast too. Maintenance, condo fees, real estate taxes, and insurance are other costs affected by inflation. As you age, you may want to look into other types of housing. Independent living retirement communities, designed for reasonably healthy older people, often require a large down payment, say $120,000, and then a monthly fee of $2,000 or more. Saving for nursing home care, which in 2009 averaged $219 a day for a private room, also might make you feel more financially secure, given that at least 40 percent of today's 65-year-old Americans will spend some time in the future in a nursing home. With medical and housing costs such a big part of a retirement budget, it's no surprise that products and services have been developed to help plan for and manage these costs. Rising health care costs, in particular, could consume all the money saved for retirement. One of the products developed is long-term care insurance, which can protect retirees' assets by paying for medical care in a nursing home and sometimes in your own home. Premiums vary by the features you choose, 21

25 such as the amount of the daily benefit paid and protection against inflation. The average premiums for a 60- year-old are about $2,300 a year. Buying such a policy at a later age means higher premiums. If you're considering a policy, get some advice, because long-term care insurance has many options and some policyholders may find the coverage isn't what they need. To cope with these future expenses, some preretirees are starting special health care savings funds at Almost 20 percent of retiree income will be spent on health care. work, separate from their retirement savings. One example is a type of account, a health savings account (HSA), which is designed to help certain employees save for future qualified medical and retiree health expenses on a tax-free basis. Essentially, an HSA is a savings account into which you can deposit money for future use. If you belong to a health plan with a deductible of at least $1,200 (for individual coverage) or $2,400 (for family coverage), you may be able to set up an HSA. Individuals who don t belong to a workplace health plan can sign up for HSAs with some banks, insurance companies, and other approved entities. These accounts can receive contributions from you, your employer, or even a family member on your behalf. You can use the funds from an HSA to help offset future medical costs, and the money in your account can be carried over from year to year. In addition, this type of account is portable; it stays with you as you move from one employer to another or if you leave the work force. To learn more about health savings account criteria, see the Resources section. 22

26 WORKSHEET F MONTHLY EXPENSES IN 10 YEARS (First year of retirement) 1 Total monthly expenses now (from monthly expenses column in Worksheet E ) 2 10-year inflation factor of (3.5%) (except for health care) 3 Total expenses in 10 years adjusted for inflation (Columns 1x2) Housing Mortgage (Including condo fees) Rent Maintenance Food (at home) Utilities Electricity Heat Internet/cable Phones Water/sewer Clothing Taxes Real estate Income (state and federal) Other property taxes Insurance House Life Car Disability Long-term care 23

27 1 Total monthly expenses now (from monthly expenses column in Worksheet E ) 2 10-year inflation factor of (3.5%) (except for health care) 3 Total expenses in 10 years adjusted for inflation (Columns 1x2) Loans Car Credit card Other Workplace retirement and personal savings Personal Care Hair cut Dry cleaning Gym Other Transportation Car repairs and maintenance Gas Parking Public transportation Health Care For a 7% inflation factor, use Health insurance Medicare Part B Medicare Part D Medicare Part C Medigap Doctor visits Hospital Medicine Over-the-counter medicine 24

28 WORKSHEET FCONTINUED MONTHLY EXPENSES IN 10 YEARS (First year of retirement) 1 Total monthly expenses now (from monthly expenses column in Worksheet E ) 2 10-year inflation factor of (3.5%) (except for health care) 3 Total expenses in 10 years adjusted for inflation (Columns 1x2) Health Care (continued) Dental Vision Noncovered items Travel/vacations Entertainment Eating out Hobbies Movies/theater Charitable contributions Other Gifts Membership dues Pet-related costs TOTAL MONTHLY EXPENSES ADJUSTED FOR 10 YEARS INFLATION (other than health) TOTAL MONTHLY EXPENSES ADJUSTED FOR 10 YEARS INFLATION (health) 25

29 ABOUT WORKSHEET F (PAGE 23): MONTHLY EXPENSES IN 10 YEARS This worksheet will show you how inflation can increase your total expenses in your first year of retirement. You will notice that Worksheet F has room for some new types of health-related expenses many retirees are likely to incur in retirement. Here is an example of the calculations you will do in Worksheet F: $ (amount spent on food each month today) x (inflation factor of 3.5%) $ (cost of the same food basket in 10 years) If you want a quick estimate, figure on at least percent of your preretirement income to cover expenses. Note that for many mortgages and some loans, your payments have taken into account the rate of inflation. If you have a fixed mortgage or loan, you will not need to do the calculation for this item. However, your mortgage expenses may change after retirement if you decide to sell your home and purchase something smaller or move to a region with lower housing costs. The worksheets in this booklet don t account for savings during retirement in order to simplify the calculations. However, you may find or put aside additional savings in retirement. For example, since your home mortgage will be paid at some point, this may be one place where money will be freed up. You may want to use that money (or other funds) as savings during retirement, whether to add to your nest egg for unexpected retirement emergencies or to plan for inflated expenses later in your retirement. But remember, it is easier to save now than it will be in retirement. 26

30 Chapter 4 COMPARING INCOME AND EXPENSES Now you will compare your income with your expenses during retirement and see if they match up. This is the number you've been working toward as you've investigated your assets and income, then expenses, and finally, figured the effects of time on your money. By the end of Chapter 4, you will discover whether you need to save more for retirement and, if so, how much more...and you will learn how to grow your savings over time. Few people will have exactly the amount of money they will need in retirement. Most will get a negative figure a gap when they do the math. If this is your situation, this chapter can help you figure how much more to save each month over the next 10 years until you retire. After you come up with your totals, be sure to read on to find out the difference a year can make and the five ways to close the gap and boost your savings. Where will you find additional savings? Here are some suggestions for active workers and retirees alike. You probably know by now the easiest way to watch your nest egg grow is to make the maximum contribution to your workplace savings plan through payroll deductions. If you are 50 or over, you will have the chance to add even more to your savings through catch-up contributions, ranging from $1,000 to $5,500, depending on the type of retirement plan you have. And you are reducing your taxes. If there's no retirement plan at work, you can add annual contributions to any IRA accounts you have. Join the Club Most people haven t thought about how long their savings will last in retirement or how much inflation will increase over time. Worksheet G is where all your prior work comes together. Building on the clues uncovered in the earlier worksheets, Worksheet G compares your anticipated income and expenses over the 30 years of your retirement. Making the comparison in dollars valued at the time of your retirement, this worksheet takes into account that while you will have a fixed monthly income, your expenses will increase due to inflation. At the beginning of retirement, most people s monthly income likely will exceed their expenses; but after a decade or so, expenses begin to exceed the monthly income. Realizing this now will allow you to save and invest any extra income in the early years of retirement so that it will 27

31 grow and can be used to cover increased expenses later in retirement. Especially if you have a shortfall, this worksheet will allow you to see how much you may need to add to your savings. When doing this comparison of your projected income and expenses, keep in mind that the value of a dollar tomorrow is less than a dollar today. The goal is to stay ahead of inflation. For example, a dollar today is worth more than a dollar in 30 years if the rate of return, say 5 percent, is greater than the Few people will have exactly the amount of money they will need in retirement. inflation rate, say 3.5 percent. The worksheet addresses the impact of inflation by converting your anticipated cash flows into a constant dollar value at the time of your retirement. ABOUT WORKSHEET G (PAGE 29): COMPARING PROJECTED INCOME AND EXPENSES Start Worksheet G by taking the total monthly income calculated in Worksheet D and multiply it by a value adjustment factor you select from Clue 3 (page 31). Select the rate of return with a 0 percent inflation rate. Then multiply this result by 360 the number of months in a 30-year retirement. Enter that amount in Column 4 of Worksheet G. 28

32 WORKSHEET G COMPARING PROJECTED INCOME AND EXPENSES- ARE YOU PREPARED? 1 At retirement 2 Inflation adjusted value factor (see Clue 3) 3 Value at retirement for one month (Column 1 x Column 2) Total projected income Worksheet D, col 3 total, page 16 Total projected expenses Worksheet F, col 3 total, page 25 Health Other than health Projected value of income less expenses Subtract line 2 from line 1 29 Next move on to expenses in row 2, taking the total monthly expenses calculated in Worksheet F. For expenses other than health, go to Clue 3 (page 31) to select an inflation adjustment value factor. Use the 3.5 percent inflation rate (used in Worksheet F) or select another that you believe will reflect inflation over the 30 years of your retirement. For health, use the 7 percent inflation rate used previously or select another rate. Multiply this result by 360 and enter it in column 4. Subtract the total value of projected expenses ( other than health and health ) over 30 years of retirement in Column 4 from the corresponding total value of your projected income (Column 4). Here is an example of how this works: Projected value of income: $1,400.00/month x (5% rate of return, 0% inflation) x 360 (months in 30 years) $260,769.60

33 4 Total value at retirement (Column 3 x 360 months) Projected value of expenses: Health expenses $ /month x (5% rate of return, 7% inflation) x 360 (months in 30 years) $98, Total projected value of expenses: $301, Other than health expenses $ /month x (5% rate of return, 3.5% inflation) x 360 (months in 30 years) $202, $260, (value of income over 30 years) - $301, (value of expenses over 30 years) - $ 40, (shortfall) As you set aside more money, the combination of savings and earnings will help close the gap. 30

34 Value Adjustment Factors 0% 1% 2% 3% 3.5% 4% 5% 6% 7% 8% 9% 10% CLUE 3 INFLATION RATE ASSUMED RATE OF RETURN 3% 5% 7% If the result is negative, don t worry. Just about everyone will need to make up a shortfall in savings. Remember, also, that it is difficult to project inflation rates, especially for health care, that far in the future. It is better, however, to have a rough idea of where you stand than have no guesstimate at all. The good news is that time is on your side. Remember the effect of interest compounding and how it can work to make your money grow in 10 years. Each year, as you set aside more money, the combination of savings and earnings will help close the gap. Worksheet H lets you figure out how much you need to start to save today to make up the gap between projected income and expenses. Multiply the gap from Worksheet G by an additional savings factor you select from the top of Worksheet H, based on the rate of return you think you will earn. For example: $40, (gap from Worksheet G example above) x (5% rate of return) $ /month to close the gap Socking away that amount of money over the next 10 years, while getting a rate of return you're comfortable with, should go a long way toward matching up income and expenses over 30 years of retirement. The good news is that you don t have to save the total amount of any gap between what you have and what you need. Each year the amount you invest will grow, and the growth of your savings lessens the amount you need to save. 31

35 WORKSHEET H ADDITIONAL SAVINGS NEEDED BEFORE RETIREMENT (IN 10 YEARS) Additional savings factors: for 3% for 5% for 7% Gap between projected total value of expenses and projected total value of income (from Worksheet G) 1 $ Additional savings factor 2 Additional monthly savings needed (multiply line 1 x line 2) 3 $ Five Ways to Close the Gap Where will you find additional savings? Here are some suggestions for active workers and retirees alike. Number 1 - Work your contributions at work Without exception, retirement planners advise contributing the maximum to your retirement plan, especially if your employer contributes, too. If your contributions are made by salary deduction, saving is easier to do and may seem almost painless. And contributing more means postponing, or "deferring," taxes until you withdraw the money at retirement. Then you may be in a lower tax bracket. Catch-up provisions for some retirement plans allow you to contribute extra amounts if you're over 50. Information about 401(k) catch-up contributions is available from your retirement plan administrator or on the Internet. If your plan has a catch-up provision, act on it now. Number 2 - Work longer, retire later Staying employed as long as possible benefits your retirement finances in several ways. Having an income gives your retirement savings more time to grow. A regular income could mean more regular savings. If you work for a company that provides health insurance, you won't have to fully pay for a policy yourself. You don't have to stay at your same job if there are other opportunities. Maybe you want a new career, one that ties in to your personal interests. Longer life spans and better 32

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